Short of funds for higher education? Take education loan

The education loans can fund your higher education. The process is simple and if followed can offer you access to funds to pay your fees and other expenses. One must pay off his education loan to remain creditworthy.

Adhil ShettyBankBazaar.com

After students pass out from schools, funding their higher studies is both a momentous event and a dilemma faced by parents. The costs of higher professional education have gone through the roof. Education loans come in as much-needed financial succour to help talented and meritorious students realise their dreams of studying in reputed professional institutes.

The most alluring feature of education loans is that they can be repaid after the completion of the particular educational course. This loan generally covers all expenses incurred towards the tuition and other fees, library charges, hostel and mess charges, cost of books and equipment, maintenance, caution fund/building fund/refundable deposit and cost of passage (for studies abroad), etc.

Students applying for education loans can approach public sector (nationalised) banks and private sector banks that offer educational loans for professional studies in India and abroad.

However, before approaching these banks, it is crucial to have sufficient prior knowledge about the various education loan schemes and their pros and cons. Also, all the possible expenses should be calculated, whether it is tuition fees or boarding and lodging expenses, before you avail an education loan. It will help you to arrive at the precise amount you need to take as loan.

The second step is to finalise the financial institutions from which you should take the loan – government banks, other government financial institutions or private sector banks and institutions. Government loans are highly subsidised and require the interest to be paid after completion of education in easy-to-pay instalments. But,some reputed financial institutions also offer loans at competitive interest rates. You should do a thorough research on all the terms and conditions regarding the moratorium and repayment periods, etc, when you apply for an educational loan.

Loan eligibility

To be eligible for an education loan, you should be an Indian national and must have obtained admission to an approved professional or technical course at a leading educational institution in India or abroad through stipulated entrance tests or the due selection process. The lenders prefer students who have a consistently good academic record. The loan applicants should have an earning parent or guardian as a co-applicant to the loan. The exact amount of educational loan is subject to the individual repaying capacity of the parents or student.

The education loan process

Once banks receive applications for an educational loan, they determine the period of the loan that normally does not exceed five years as well as the margin money that has to be paid by loan-seekers. Generally, for a loan above Rs 4 lakh, you have to furnish the minimum down payment (payment from your own sources) of five per cent for studies in India and fifteen per cent for studies abroad. However, the requirement for the minimum down payment is dispensed with in case of loans below 4 lakh. The course for which the loan is being taken should justify the amount of loan. Mostly, lenders grant the maximum amount of Rs. 10 lakh for studies in India and Rs. 20 lakh for overseas professional education.

Planning the loan repayment

Generally, education loans have a repayment period ranging from five to seven years and the EMI startsfrom the first year after the course completion or six months after the loanapplicant secures a job. But, in some cases, the repayment period starts within six months of course completion. In case a student finds it difficultto service the loan, it is advisable to request the lender to re-schedule the repayment period or seek for a moratorium period.

If you secure a well-paid job on completion of the course, the repayment can be acceleratedto repay your debts as early as possible. Thus, you can maintain your credibility and good track record, as well as save on your first earnings.Significantly, students can prepay educational loans without attracting any penalty.

Implications of moratorium period

Students need not pay interest during the moratorium period. But, there is a cost. For instance, if you avail a loan amount of Rs 5 lakh with the moratorium period of three years and loan repayment period of seven years at an interest rate of 13 per cent per annum, a simple interest is calculated on the disbursed amount from the date of disbursement. A compounded interest payment starts from the first EMI date.

Difference between secured and unsecured education loan

Most education loans fall into the unsecured loan category, but in some cases, collateral security can be asked. Collaterals asked for education loans are usually property owned by the guarantor (parent), which is free from any other legal complications or liabilities. Therefore, if a student fails to repay the loan, the consequences can be quite grave.

Most loans offered by PSBs are secured education loans. Generally, they have lower interest rates and their rates are fixed, compared to the variable rates of private lenders. Most secured loan providers also offer options of delayed repayment in the event of illness or prolonged unemployment.

Unsecured student loans from a bank or private lender usually have higher-than-average interest rates due to the risk component on providing a loan without any collateral. But, such loans provide a sizable amount of money to students in a relatively short span of time.

Education loans are a handy option, especially for many underprivileged students. The government intends to make it available for all those who qualify on the basic parameters, irrespective of their financial status. For the same reason, these loans are offered without stringent scrutiny, unlike other loans. However, defaulting on education loan payments will adversely affect the borrower’s as well as the guarantor’s (parent’s) credit-worthiness, which would render any fresh borrowing in the future a difficult proposition.